Investment Advisers

Securities Cases: Broidy Wealth Management Advisors Founder Pleads Guilty to Fraud, Bondholders File Arbitration Claim Against BOK Financial, and SEC Files Complaint in $5M Pyramid Scam

Published on: February 26, 2017 | by Shepherd Smith Edwards & Kantas, LLP

RIA Misappropriated Over $865K and Withdrew $640K in Excess Fees, Say Prosecutors
Broidy Wealth Advisors CEO Mark Broidy has pleaded guilty to taking $640K in excess management fees from clients and misappropriating over $864K in stock that were in trusts of which he was the trustee. Now, the registered investment advisor must make restitutions to those whom he defrauded. He could end up serving up to five years behind barsamong other penalties.

According to the Justice Department, from around 11/2010 to 7/2016 Broidy billed more than what he was allowed to in compensation, which caused three clients to pay more than $640K in excess fees. He concealed his theft by falsifying those clients’ IRS Form 1099s.

After one client demanded that Broidy pay back the stolen funds the latter allegedly sold over $865K of stock from another client’s trust accounts, which were for that person’s children. Broidy also suggested that several clients invest in startups with which he had deals to pay him part of any money he raised on the companies’ behalf. The clients didn’t know about these arrangements.

Institutional Investor’s CDO Fraud Case Against Patriarch Partners, Lynn Tilton to Proceed

Published on: February 24, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The New York State Supreme Court has ruled that the $45M institutional investor fraud case against Patriarch Partners and owner Lynn Tilton may proceed. The financier had sought to have the fraud charges against her dropped.

The plaintiff is Norddeutsche Landesbank Girozentrale. The German bank, known as Nord/LG, invested in Tilton’s Zohar debt fund. Nord/LG later accused Tilton of misrepresenting the fund’s structure and brought a collateralized debt obligation lawsuit against her and her firm.

The German bank contends that it didn’t know that fraud might have occurred until the US Securities and Exchange Commission brought a civil case against Tilton and her firm in 2015. The regulator wants disgorgement of about $200M in allegedly bogus fees that Tilton and Patriarch purportedly collected for their services. The SEc also wants to bar Tilton from the industry.

Dallas Investment Firms Charged with Texas Securities Fraud in Alleged Ponzi Scam

Published on: February 18, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission has filed Texas fraud charges against Patrick O. Howard, Optimal Economics Capital Partners, LLC (OE Capital) and Howard Capital Holdings, LLC. Howard controls the two Dallas-based companies., which have raised about $13M from 119 investors. The regulator is alleging that the money went to fraudulent offerings involving private fund investments in three limited liability companies and that Howard falsely presented himself as a registered investment adviser when, in fact, he was not. In addition to offering and selling units through OE Capital, he retained two firms to do the same and paid them a 5% commission.

The SEC is charging Howard and his companies with violating the Securities Act of 1933, the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. The regulator wants permanent injunctions, disgorgement, prejudgment interest, and civil penalties.

According to the Commission, which filed its complaint under seal in Dallas federal court, Howard and his two companies promised investors 12-20% yearly returns, along with minimal risk. They also purportedly claimed that almost all invested money would go toward acquiring interest in revenue streams of the portfolio companies and that promised returns were insured.

SEC Charges Connecticut RIA with $3.95M Fraud, Ex-Morgan Stanley Financial Adviser with $5M Securities Scam

Published on: February 8, 2017 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed fraud charges against Sentinel Growth Fund Management and its owner Mark J. Varacchi. The regulator is accusing the Connecticut-based investment advisory firm of stealing at least $3.95M from investors. Over $1M was allegedly used to resolve private litigation in which Varacchi was the defendant.

According to the Commission, Sentinel Growth Management Fund and Varacchi misrepresented to investors that their money would go to hedge fund managers to be invested. Instead, the investment advisor firm allegedly commingled investor money and manipulated account balances, activities, and investment returns as part of a securities fraud.

Now, the SEC wants disgorgement and penalties brought against Varacchi and his firm in this investment advisor fraud case.

Aon Hewitt Accused of Kickback Scam with Financial Engines in 401(K) Lawsuit

Published on: February 5, 2017 | by Shepherd Smith Edwards & Kantas, LLP

A 401(K) participant is suing Aon Hewitt for its purported involvement in a kickback scam involving Financial Engines. Aon Hewitt is not the first company to be subject to such allegations involving the 401(K) advice provider.

According to a participant in the Caterpillar 401(k) Retirement Plan, the alleged “covert kickback operations” cost retirement savers millions of dollars as a result of the excessive fees paid to Financial Engines for managed-account services. The complaint contends that the service fees were much higher than needed because of an agreement between Aon Hewitt and Financial Engines in which the latter paid the former kickbacks.

The kickbacks were purportedly a substantial percentage of the fees that Financial Engines charged, even though Hewitt and its sister companies, which are also defendants in the 401(K) lawsuit, didn’t provide any investment advisory services in exchange for the payments. According to plaintiff Cheryl Scott, Aon Hewitt received a 20-25% kickback.

SEC Cases: Morgan Stanley to Pay $13M for Custody Rule Violations and Overbilling Clients, BNY Mellon to Settles Allegations of Reported Miscalculations By Paying $6.6M, and Citadel Securities to Pay $22M for Purportedly Misleading Clients About Pricing Trades

Published on: January 17, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley Accused of Overbilling Investment Advisory Clients

The US Securities and Exchange Commission announced that Morgan Stanley Smith Barney (MS) will pay a $13M penalty to resolve charges accusing the firm of overbilling clients through billing system and coding mistakes and violating the custody rule regarding yearly surprise exams.

As a result, said the regulator’s order, Morgan Stanley has agreed to pay over $16M in excess fees because of billing mistakes that took place from ’02 to ’16. Investment advisory clients that were affected have been paid back the excess fees in addition to interest.

According to the Commission, Morgan Stanley overcharged over 149,000 investment advisory clients. The reason for this is that the firm did not put into place compliance policies and procedures that were designed reasonably enough to make sure that clients were accurately billed according to their advisory agreements. The SEC said that Morgan Stanley did not validate billing rates that were in its billing system against client billing histories, contracts, and other documents.

Securities Fraud Cases: Connecticut-Based Investment Adviser Settles Fraud Charges that Allegedly Involved Secret Referral Fees, Jefferies Bond Trader’s Second Criminal Fraud Trial is Underway, Former Barclays Trader Gets 5-Month Prison Term in Insider Case

Published on: January 11, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Investment Adviser Settles SEC Case for $575K
John W. Rafal, a Connecticut-based investment adviser, has agreed to settle US Securities and Exchange Commission charges for $575K. As part of the settlement, Rafal is admitting wrongdoing in a civil case that accuses him of bilking a client and then trying to mislead the SEC while lying to other clients about the regulator’s probe.

The SEC said that Rafal paid attorney Peter D. Hershman in secret for referring one of his client’s to Essex Financial Services, which is the firm that Rafal founded. He is no longer affiliated with Essex. Rather than disclose the referral deal to the older widow who was that client, Rafal and Hershman concealed the payments as “legal fees.” Even after Essex officers found out about and stopped the referral arrangement, the deal between the two men continued in secret. The SEC also said that Rafal responded to rumors that he had violated a securities law by emailing his clients and falsely stating that the regulator’s probe had been resolved. He also purportedly tried persuading the Commission that his arrangement with Hershing was over.

Essex Financial Services will pay $180K in disgorgement and interest to resolve charges connected to Rafal’s wrongful behavior. Herhsman will pay over $90K to resolve the civil charges accusing him of aiding and abetting the violations committed by Rafal. The two men agreed to a securities industry bar and from serving in the roles of director or officer for any publicly traded company. They also are no longer allowed to represent clients regarding SEC matters.

Hedge Fund Fraud: SEC Partially Overturns Ruling Against Investment Adviser But Raises Amount He Owes & Jury Selection Begins in Former Visium Fund Manager’s Bond Fraud Case

Published on: January 9, 2017 | by Shepherd Smith Edwards & Kantas, LLP

Ex-Visium Fund Manager on Trial for Bond Fraud
Jury selection is scheduled to begin this week in the criminal trial against Stefan Lumiere, an ex-Visium Asset Management LP portfolio manager. Lumiere, who managed the Visium Credit Opportunities Fund, is accused of falsely inflating the value of securities in a fund and committing bond fraud.

Visium Asset Management LP is a New York based-hedge fund. The $8B investment hedge fund shut down in 2016 after a criminal investigation that led to charges against a number of people, including Sanjay Valvani, who killed himself several months ago following allegations of insider trading.

According to prosecutors, from ’11 to ’13, Lumiere was among a number of people who conspired to bilk investors through the mismarking of securities’ values that were in a fund that invested in healthcare company-issued debt. The prosecution believes that the alleged misconduct caused the net asset value of the fund to be overstated by tens of millions of dollars monthly. Meantime, investors were fooled into thinking the bonds were very liquid even though they were illiquid.

Lumiere pleaded not guilty to securities fraud, conspiracy, and wire fraud charges last year.

Securities Fraud: Two Indiana Men Are Charged with Running Ponzi Scam, NY Investment Adviser Gets Five-Year Prison Sentence for $1.725M Scam, and Illinois Investment Firm Owner is Ordered to Pay $270K in Restitution

Published on: December 29, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Two Men Are Accused of Scamming Indiana Investors in More than $3.5M Ponzi Scam
Prosecutors are charging two Indiana men with securities fraud involving a Ponzi scam. They claim that Richard E. Gearhart and his business partner George R. McKown sold securities to investors who moved their annuities, pensions, cash, and 401ks to invest in Asset Preservation Specialists Inc. The investors were purportedly promised a guaranteed return rate.

The authorities say that McKown and Gearhart were not registered with the state of Indiana or the Securities and Exchange Commission to sell these securities.

It was in 2013 that a number of Gearhart’s clients filed complaints against him after he filed for Chapter 13 federal bankruptcy. They contended that their losses collectively totaled over $2M. Court records, however, indicate that the two men allegedly stole over $3.5M from over two dozen investors. between ’08 and ’13.

Criminal Securities Fraud: Former Train Babcock Financial Adviser Pleads Guilty In $1.6M Family Trust Theft, Prosecutors Go After Former Cantor Fitzgerald Trader for RMBS Fraud, & Two NJ Traders Are Charged in $26M Stock Rigging Case

Published on: December 14, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Financial Advisor Admits to Stealing $1.6M From Family’s Trusts
Brian Keenan, an ex-financial advisor, has pleaded guilty to criminal charges accusing him to stealing over $1.6M from three trusts belonging to members of the same family. Keenan had been employed with Train Babcock Advisors from about 5/2007 to 8/2012. It was during this time that the former financial adviser stole over $1.6M from the beneficiaries of three trusts.

Not only did Keenan take their money, but he also spent the funds on his own expenses. He set up a joint checking account under his name and the name of one of the beneficiaries, and he issued over 40 checks from the trust accounts to the joint account. The beneficiary under whose name he co-opened the account did not have access to it.

Issuing a statement about the financial fraud case, Manhattan District Attorney Cyrus R. Vance reminded the public that a financial adviser’s main duty is to act in a client’s best interest. Vance said that rather than fulfilling that obligation, Keenan took advantage of his clients. Keenan pleaded guilty to Grand Larceny in the First Degree.